In evaluating the coverage of a bank's Regulation U compliance for loans to purchase or carry margin stocks, which of the following securities is NOT covered in the regulatory definition of "margin stock"?
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A. B. C. D.B
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Regulation U is a Federal Reserve Board regulation that governs loans made by banks for the purpose of purchasing or carrying margin stock. Margin stock refers to any equity security registered on a national exchange or having unlisted trading privileges. However, not all securities that meet this definition are considered margin stock for the purposes of Regulation U.
Option A states that any OTC stock is not covered in the regulatory definition of margin stock. This is incorrect. OTC stocks that meet the definition of margin stock (i.e., equity securities registered on a national exchange or having unlisted trading privileges) are subject to Regulation U.
Option B refers to a security issued by an investment company licensed under the Small Business Administration (SBA) Act. These securities are exempt from the definition of margin stock and are therefore not subject to Regulation U.
Option C refers to a warrant or right to subscribe to, or purchase, a margin stock. These securities are considered margin stock and are subject to Regulation U.
Option D refers to an equity security registered, or having unlisted trading privileges, on a national exchange. This is the definition of margin stock under Regulation U, and these securities are subject to its requirements.
Therefore, the correct answer is B, a security issued by an investment company licensed under the Small Business Administration Act, which is exempt from the definition of margin stock and therefore not subject to Regulation U.